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Friday, May 13, 2011

I made a faux pas recently. Because, I used the uncouth urban dictionary term demand destruction in the same sentence as corn. You see, real economists do not say demand destruction.

At times like this when things get outtacontrol, we can always count on our friends, Scott Irwin and Darrel Good, over at the University of Illinois - Urbana, to set us straight. Recently, they wrote to explain the misunderstanding to us (complete with mathematical diagrams — of course!).

During the period of rapidly increasing commodity prices since the summer of 2010, there has been occasional reference to “demand destruction” resulting from higher prices. That terminology is misleading and conceptually incorrect. What commentators are generally referring to, of course, is that high and increasing prices would be expected to result in less consumption of the commodity than would have occurred at lower prices. That relationship, however, does not constitute demand destruction. That is, a change in consumption in reaction to a change in price does not represent a change in demand.

Demand for a commodity is generally described as the negative relationship between price of that commodity and the quantity that end users are willing to consume. That is, all else equal, users would be expected to consume more at lower prices and less at higher prices (figure 1). Conversely, producers of the commodity would be expected to produce more at higher prices and less at lower prices (positive relationship between price and quality), all else equal. The market equilibrium price and quantity are established by the intersection of supply and demand (figure 2). For annually produced crops, supply for a particular marketing year is essentially fixed (vertical supply curve) at the level of production plus stocks on hand at the beginning of the year. With a given demand structure, a small crop would result in less consumption and a higher price than would occur with a large crop (figure 3). That change in consumption, however, does not represent demand destruction, but rather a movement along the demand curve. read more...

Personally, I rather liked the "dd" term and breaking myself of this bad habit won't be easy. Nevertheless, thanks for setting us straight, Farm Doc Daily experts. K. McDonald